Since Congress passed Section 401(k) of the Internal Revenue Code relating to employee benefits programs, the use of such "401(k)" programs has skyrocketed. In 1995 alone, over half a trillion dollars were invested through such programs. With much of the money coming from automatic employee payroll deductions, the flow of cash into such programs is relatively steady and continuous. Considering the high volume and predictability of flow into the programs, setting up and managing the programs has become a lucrative segment of the investment banking industry. Also due to the high volume, the need for processing and tracking information relating to the investments has also presented logistic problems.
To eliminate such problems, the investment industry quickly realized that by limiting the number of investments available to 401(k) plan participants, the resulting record keeping and processing requirements necessary to maintain the plan are kept to a minimum. Most updating processes can be and have been accomplished manually in a cost-efficient manner with such a limited selection of investments.
Even with automation of some of the record keeping responsibility of plans, much of the work is still done manually. This is evidenced by the fact that the prior commercially available systems for running 401(k) plans were severely limited in the number of investments they could offer. Few plans offer more than a handful of investments, with each investment being a different stock, mutual fund or other type of investment.
The growth of 401(k) plans has also meant a larger segment of the population has purchased investments, rather than the more traditional savings accounts, with a parallel rise in the investing savvy of the general population. Given the thousands of investments available on the U.S. exchanges, combined with those traded over the counter, providing less than ten choices to a participant eliminates a wealth of investing options that are otherwise available under the 401(k) statutes and regulations.
One of the common systems used today for tracking and processing benefits plans is the Omniplan Benefits Processing Software of Sungard Corporation of Birmingham, Ala. The Omniplan software in its standard configuration is limited to 400 combinations of investments and money sources. There are various money sources for participants, including, but not limited to, before-tax contributions, after-tax contributions and company contributions. The architecture of the Omniplan software makes it impossible to increase the number of combinations beyond 600. Obviously, there are many more than 600 investments available for purchase, so the Omniplan software is inherently incapable of handling a complete menu of investments.
The industry has not limited participants' choices up to now without good reason. Increasing the number of available investments, and thus the number of investment-money source combinations makes various support tasks either logistically impossible or so cost-intensive as to make the plan not profitable for the financial institution running the plan. Assuming, generally, that the plan records are stored on a computer, these support tasks include, but are not limited to, entering and maintaining the information on the available investments, tracking and crediting dividends, tracking investment pricing, and commissions calculations.